Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas 35 comments
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Ranked #3 on Forbes' Best Brokerage Analysts for 2009, Oppenheimer Senior Analyst Fadel Gheit sat down with The Energy Report to shed light on existing conditions in the oil and gas sector. In terms of oil prices, "financial players are more in control now than oil companies or OPEC," according to Fadel, who is currently more bullish on gas than on oil. "Despite the fact that gas stocks gained significantly this year," he says, "we think the upside potential remains great."
The Energy Report: Why is there such a high ratio and differential between natural gas and oil right now?
Fadel Gheit: Because oil is a global commodity; gas is a regional commodity. You can have a huge discrepancy in gas prices from country to country, from continent to continent, because of a lack of adequate transportation— the means of shipping to take gas from where it's found in abundance to where it's needed. For example, gas in the Middle East has no value because there is no local market for it. Most of the oil-producing countries actually flare gas because, basically, they use gas, you call it, as a drive. They use gas to pump it back in the oil field instead of water, because they don't have water, so they use natural gas that comes as a co-product with oil to pump it back into the wells to push oil because that's what they want. They want oil; they don't want gas.
We do the same thing in the Alaska North Slope. The oil companies that operate the fields put away the used gas to push it back into the oil field to lift up oil because there is no pipeline to take the gas into the lower 48. So the reason that oil will always sell at premium to gas is because of the ease of transportation from one place to the other. Pound for pound, it's only the transportation differential between oil delivered to Rotterdam or oil delivered to Houston. Oil, also, is the more politically-driven commodity than is gas—much more politically driven. If OPEC decided to do something and if Russia, OPEC and other producers decided to slow down, guess what? Oil prices will go up. We don't have a cartel or consortium to control natural gas.
TER: Yet.
FG: Yet.
TER: Sometimes I think Putin thinks that he has the beginnings of a consortium.
FG: It's very difficult to implement. Theoretically, it could happen, but I would say decades from now because the global distribution system is light years behind oil. Ships are not available and cheap enough to make natural gas a global market yet. As I said, it will take decades in order for us to reach parity between oil and gas. Gas is a much more preferable fuel. It's cleaner, it doesn't have any messy spills and it doesn't kill. But, obviously, how to transport it is the tricky part.
TER: Supply and demand seems to be an equilibrium at about 80 million barrels a day. What's going to kick in demand?
FG: Two things. Oil prices have not been driven by supply and demand fundamentals for years. This was exacerbated by the incredible influx of money from financial players into the commodity markets over the last five years and especially oil, which basically created the oil bubble that we had last year. Supply and demand fundamentals are beginning to play a secondary role now in oil prices. Financial players have much more clout and basically manipulate—influence, if not manipulate—oil prices; that is very clear. That's why we have the investigation by the CFTC and all the hearings. I am not holding my breath to see any changes because the politically motivated individuals and the incredible lobbying by financial institutions make it very, very difficult to regulate or enforce regulations in the books to stem that incredible increase in financial institution influence on the commodity prices.
TER: So do you have a view as to where oil is going to go over the next 6 to 12 months?
FG: I can tell you oil prices will remain inflated and not fully reflect supply and demand fundamentals. I just got a call from the Kuwait National Oil Company. They are wondering when this is going to end. I said, don't hold your breath. It's not going to end. They basically believe what I believe—that financial players are more in control now than oil companies or OPEC or anybody else. They play on the perception or the outlook—oh, OPEC is going to cut production. Okay, then they jack up, they start making bets that oil prices will go higher. We have not had any supply problems with the brief exception of the hurricane and, even with the hurricane, the fact of the matter is that the hurricane impaired our refining capacity more than oil supply. The Kuwait guy was just telling me that after Hurricanes Rita and Katrina, everybody said, 'oh, send us more oil.' He said, why do you need more oil? You don't have the refining capacity to process the oil. There's no shortage, yet oil prices obviously moved up very sharply because financial players, again, gave this perception that, my God, we're going to run out of this or out of that. But in fact, we had a shortage of gasoline not because we did not have enough oil. It's because we didn't have enough facilities available to process the oil that we have.
TER: So that provided the squeeze, but just further down the food chain?
FG: Absolutely. For all practical purposes, the reason I think oil prices will remain inflated is because I truly believe the financial players—who've already tasted blood and are not going to let go because this has now become the single-largest source of trading revenue—are betting on commodity futures. First of all, the derivative, which destroyed the financial market, was basically like a chain letter. You send it to your neighbor and so forth, nobody can really catch it anymore. It's like the flu. It just will become contagious throughout the world. If you look at the income statements of the major financial institutions, they don't break up their revenue from oil trading. But it's a multi-billion dollar business for the large players like Goldman Sachs and Morgan Stanley. And they absolutely refuse to and do not disclose it because it is more lucrative than bank robbery. As I said, it's not illegal because it's deregulated. One of the biggest players now in addition to ETFs, believe it or not, is pension funds. Pension funds are buying huge amounts of oil because it is something that they think will continue to generate huge returns and they have and they've been very successful. Anyway, I find it very difficult to believe that the CFTC will be able to regulate trading.
TER: What would you recommend in terms of an investor's portfolio of some of the stocks that you recommend they buy? Maybe start with some major integrated companies.
FG: Actually, on the major integrated oil companies we think they are going to do okay. But, as I predicted earlier this year, they are not going to outperform the market. So we think "market perform," and that is at best. The market perform was the fact investors are willing to pay the stocks, number one, because they are safer, more secure and they pay dividends. All these things are very positive and that is an attribute that you cannot find at the smaller companies. However, smaller companies offer things that the large companies don't have and that is basically the upside potential.
We've been bullish on smaller integrated oil companies like Hess Corporation (NYSE: HES), Marathon Oil Corporation (NYSE: MRO) Murphy Oil Corporation (NYSE: MUR), and Hess did not do as well, but Marathon and Murphy clearly outperformed the market. Why? Because any exploration success will be meaningful for any of these companies and they are more leveraged, if you will, to improvement in oil prices.
A company like Exxon (NYSE: XOM) is the largest company in the world—the largest oil company—obviously. They are down so far this year 12%. The market is up 18%. So you're basically down 30% vs. the market; that is not a good year for Exxon. It has the strongest balance sheet, it has more cash than debt, but investors say 'why should I care?' There is no capital. They cannot grow reserves, they cannot grow production. There is no gross prospect, so why should I pay any premium for stock if it's going to give me 2% or 3% dividend yield? That's not enticing enough. So we shied away from companies that have exposures to refining, especially the larger companies, because, as I said, the larger companies have no prospects for real growth or interesting or meaningful growth. They can hardly keep their production from declining, let alone grow it. Because most of their operation is outside the U.S., rising nationalism limits their access to resources. Venezuela kicked Exxon out, for example, and ConocoPhillips (NYSE: COP). The Nigerian situation makes life more miserable for Chevron Corp. (NYSE:CVX) and for Royal Dutch Shell plc (RDS.A). Russian corruption and arm-twisting by the government and all these things make it very difficult for oil companies to do anything there. So our focus has been from the beginning and continues to be the large and the small, basically, the E&P companies or the domestic oil and gas producers, and they have done very well.
TER: What are some of the names of the small and large companies?
FG: The large cap E&P are Anadarko Petroleum Corporation (NYSE: APC), Apache Corporation (NYSE: APA), Devon Energy Corporation (NYSE: DVN), EOG Resources, Inc. (NYSE:EOG), Noble Energy, Inc. (NYSE:NBL), Occidental Petroleum Corporation (NYSE:OXY) and XTO Energy, Inc. (NYSE: XTO). The smaller names—actually, I don't have many of them and that's where we're going to expand—are Cabot Oil & Gas (NYSE: COG), Comstock Resources, Inc. (NYSE: CRK) and Pioneer Natural Resources (NYSE:PXD).
TER: Any other points you'd like to make before we wrap up?
FG: Yes. We are more bullish on gas than on oil. Oil prices are up 62% so far this year, but natural gas prices are down 53%. So if you do pair trade, you're off by 95%. The reason being, as I said, because oil prices are manipulated and also politics get into the way when natural gas prices are depressed because of the glut in natural gas, so it's more a reflective of what's happening right now. So we went, again, with the conventional wisdom and we said, despite depressed gas prices, the upside potential in gas stocks is the highest because they offer real growth opportunity. We saw that clearly today. Anadarko announced some discovery in West Africa. The stock is up 10% in one day. Obviously, Exxon will never be up 10% in any one day even if they discover another Kuwait. So you can see, the relatively smaller company—anything compared to Exxon is small—that has the added catalysts, which is upside potential for exploration, obviously, gains the most.
So any company that has exposure to exploration did very well, especially if they delivered on this promise and basically made discoveries; and Anadarko is obviously the one that benefited the most because they have announced a new discovery almost every month. How many times did Exxon announce a discovery? Not for years. So still, despite the fact that gas stocks gained significantly this year, we think the upside potential remains great and we think the upside potential is greater than the downside risk. We don't think that gas prices can go any lower from there because they cannot be sustainable at lower prices because that will dry up domestic production and, basically, 80% or 90% of our demand is satisfied by domestic production. So the market will be self-correcting.
The longer gas prices remain low, the more violent, if you will, the rebound and the price is going to be. But I still believe we are not likely to see gas prices going to $8 or $9 as they were a year ago. We think more likely they're going to basically be within the trading range of, say, $4 to $6, closer to $5–$6. When you do that, you bring the gap in expectation between buyer and seller closer and, therefore, you get what you've been waiting for, an industry consolidation. This industry needs to reconsolidate so desperately because that would bring additional efficiency, clout, diversification, economies of scale and it will lower risk and increase return. It's only a matter of time before that will take place, which will be good for the stock, good for the industry and good for the country.
TER: This has been great, Fadel. Thanks so much for your time.
Oppenheimer & Co. senior analyst Fadel Gheit is a Managing Director covering the oil and gas sector. He spent six years with Mobil Oil and five years with Stone & Webster. He has been an energy analyst since 1986 with Mabon Nugent and JP Morgan and has been with Oppenheimer & Co. Inc. since 1994. He has been named to The Wall Street Journal "All-Star Annual Analyst Survey" four times and was the top-ranked energy analyst on the Bloomberg Annual Analyst survey for four years. He is one of the most quoted analysts on energy issues and has testified before the U.S. Senate and the U.S. House of Representatives about oil price speculation, and is a frequent guest on TV and radio business programs. Fadel holds a B.S. in chemical engineering from Cairo University and M.B.A. in Finance from New York University.
Company Specific Disclosures
The analyst/associate/member of the analyst's or associate's household owns a long position in BP.
The analyst/associate/member of the analyst's or associate's household owns a long position in COP.
The analyst/associate/member of the analyst's or associate's household owns a long position in CVX.
The analyst/associate/member of the analyst's or associate's household owns a long position in DVN.
The analyst/associate/member of the analyst's or associate's household owns a long position in RDS/A.
The analyst/associate/member of the analyst's or associate's household owns a long position in XOM.
The Oppenheimer & Co. Inc. analyst(s) who covers this company also has a long position in BP, COP, CVX, DVN, RDS/A, and XOM.
A member of the household of an Oppenheimer & Co. Inc. research analyst who covers this company has a long position in BP, COP, CVX, DVN, RDS/A, and XOM.
Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3 months from XTO.
Email: jmallin@streetwisereports.com
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This article has 35 comments:
to save a lot.
On Oct 09 10:53 AM Michael Fitzsimmons wrote:
> to say that oil isn't trading on fundamentals after 2008's supply/demand
> thin margin, an oil war in iraq that took millions off the margin
> (and added a geopolitical risk that has not gone away), the current
> iranian crisis, and the fact that china is circling the globe locking
> up oil deliveries well into the future, is simply putting one's head
> in the sand. with all due respect to mr. gheit, he is overstated
> the role of financial manipulation. the fact is, all the issues i
> listed above will continue to firm foundation under oil, and if the
> world economy ever begins to function "normally" again, you'll see
> oil prices zoom higher and eclipse the $147/barrel high very easily
> - especially when you consider that oil is priced in U.S. dollars,
> and we've all witnessed where that is going. at the same time, the
> U.S. is awash in natural gas, and as pickens said on CNBC the other
> day, we're *stupid* not to use natural gas in the transportation
> sector.
The U.S. Department of Energy (DOE) officially recognize that compressed natural gas (CNG), liquefied natural gas (LNG), and liquefied petroleum gas LPG or propane) as alternative fuels.
In 2000, there were about eight million vehicles around the world that ran on alternative fuels, a figure that speaks to the increasing popularity of alternative fuels. There is growing social interest as well as economic and political impetus -- due to concerns over sustainability, energy security, environmental impacts, and economics relating to oil, and overall geopolitical apprehensions -- for development of alternative fuel sources principally due to the fact that conventional fuels contribute directly to the global warming. Another issue relates to escalating costs for petroleum-derived fuels caused by severe shortages of oil in an era of growing energy consumption. In addition, the majority of the known petroleum reserves are located in the Middle East, and there is concern that worldwide fuel shortages could intensify the unrest that exists in the region, leading to further conflict.
Alternative fuel vehicles offer numerous benefits. They produce lower emissions and fewer toxic contaminants than gasoline and diesel vehicles and thus have reduced impacts on air quality, global warming, the environment, and public health.
How could I pass up a title like "Don't Pass on Gas" ???
On Oct 09 11:54 AM Giulio Negrini wrote:
> Natural gas is the best fuel for the transportation sector. U.S.
> use 70% of oil for transportation if we convert to LNG we are beginning
>
> to save a lot.
Sell-side analysts and commodity brokers seem to be obsessed with the fact that oil and refined products inventories are at very high levels currently. What they fail to consider, and what I think hedge fund managers, pension fund managers and the average ETF buyer realize, is that if the global economy catches a bid (i.e. if world GDP growth begins to accelerate), the price of oil will quickly reach new highs.
90% of the world's oil reserves are in the hands of sovereign oil companies. They have been using the enormous cash flows from these companies to placate their constituents and not reinvest in the business. The result is that countries like Venezuela, Mexico, Iran, Nigeria and others have exhibited 15-25% production declines over the past decade. They have been able to maintain their solvency due to the recent price increases. The major oil producers have no intention of using their own capital to maintain the production of their fields and will continue seeking to rent private sector capital at the lowest possible price (e.g. BP's recent contract with Iraq).
Myopic traders are completely focused on the weak demand situation. Real investors are focused on the future paucity of supply. I believe oil will easily broach a triple-digit handle in 2010.
Source :
jimrogers1.blogspot.com
Your simple statement does not do your analytical skills proud1
But I will agree that's way the market forces work.
While no disrespect is intended to Fadel or energy bulls, I think passing on natural gas is wiser, than betting on it.
I see increased worldwide demand for fuels (particularly from emerging markets), I see billions invested in transferring our shale gas technology to Europe (so they will not be under Russia's heavy thumb), and I see inflation resulting from the banking crisis that resulted in governments in the USA and Europe printing trillions in currency (these governments will use inflated currency to pay off their massive debts).
I am also placing long-term bets on alternative energy (for which demand will be driven by both new technologies that make it more efficient, and it's being price-competitive to $200/barrel oil without government subsidies).
What exactly will the Russians have to sell? Oil? Yep. I would not be quite so bullish on oil.
What happens when LNG is not so profitable? What will the LNG countries have to sell? Oil? Yep.
www.amazon.com/gp/prod...
That will put a cap on oil prices i.e. the cost of deep wells.
----------------------...
I agree the traders will use any increase in demand due to an improving economy as an excuse to create a self fulfilling prophecy running oil back up. Eventually the burden of ridiculously priced oil will slow the economy down and cut demand, giving the traders an excuse to go short and create a new self fulfilling prophecy. Rinse and repeat. Traders have already done enough damage to our economy do we really want to let them reek further havoc? If you don't produce it or use it you shouldn't be trading it.
"Inflation's Coming, Hide Here"
www.forbes.com/forbes/...
"Waxman-Markey Flunks Math"
www.forbes.com/forbes/...
"Buy Into Fossil Fuels"
www.forbes.com/forbes/...
On Oct 10 09:13 AM MSimon wrote:
> With new gas drilling technologies developed in America Europe expects
> to use a lot less Russian gas in the coming years.
>
> What exactly will the Russians have to sell? Oil? Yep. I would not
> be quite so bullish on oil.
>
> What happens when LNG is not so profitable? What will the LNG countries
> have to sell? Oil? Yep.
Demand or manipulation, oil prices will remain high.
So invest accordingly.
Pardon my attempt at humor - I'm glad you proofread your comment and inserted the two letter word in your title quote.
On Oct 09 02:52 PM Living4Dividends wrote:
> Great interview.
>
> How could I pass up a title like "Don't Pass on Gas" ???
Source :
4currencies.blogspot.com
Look at the 15 month chart for UNG. When I see a trend like that (straight as an arrow from over $60 to $9.01on Sept. 3), it makes my contrarian blood boil. Any commodity that loses 86% in 15 months gets my attention. Now, the close on Friday was $11.81, up 31% from Sept. 3, but still down 81% from July, 2008. Simply looking at the oil/nat gas price ratio (which is not reliable to do rigorously, as the author has cautioned in the article), UNG could well be around $30 +/- right now.
I know from your past comments that you are not a big fan of traders and technical analysis, but I hope you will allow me the liberty of disagreeing with you on such grounds. And, for one little fundamental creeping in for consideration, we are going into winter in the northern hemisphere. That is when demand for nat gas increases seasonally.
So, I respectfully take the opposing view to you and support Mr. Gheit. I bought UNG a couple of weeks ago and put it in my contrarian portfolio for the autumn at TheStreet.com (www.thestreet.com/stor...) and (www.thestreet.com/stor...)
By the way, glad to see your comment here. I always enjoy reading your comments, whether I agree or disagree, and have not seen you for a while.
On Oct 10 09:09 AM Ferdinand E. Banks wrote:
> Interesting interview, but full of holes. I'm still not sure that
> Michael F. is right about gas, but he has more on the ball than Mr
> Gheit.
My comment reply to Ferdinand E. Banks notwithstanding, I find your arguments compelling. I would say that your projections should be considered not a case of "if", but "when". I am looking at the short-term scenario and am long on nat gas for the next several months. If the recovery sputters, there is a flight to safety and oil prices decline, my trade will suffer. However, when you look at the cost per btu, the oil/nat gas price ratio is way out of whack (greater than 3/1).
As Pickens says in the quote you presented: "...we're *stupid* not to use natural gas in the transportation sector."
My observation is, why should we be any different regarding nat gas and transportation than so many other places you look? (RE - stupidity)
On Oct 09 10:53 AM Michael Fitzsimmons wrote:
> to say that oil isn't trading on fundamentals after 2008's supply/demand
> thin margin, an oil war in iraq that took millions off the margin
> (and added a geopolitical risk that has not gone away), the current
> iranian crisis, and the fact that china is circling the globe locking
> up oil deliveries well into the future, is simply putting one's head
> in the sand. with all due respect to mr. gheit, he is overstated
> the role of financial manipulation. the fact is, all the issues i
> listed above will continue to firm foundation under oil, and if the
> world economy ever begins to function "normally" again, you'll see
> oil prices zoom higher and eclipse the $147/barrel high very easily
> - especially when you consider that oil is priced in U.S. dollars,
> and we've all witnessed where that is going. at the same time, the
> U.S. is awash in natural gas, and as pickens said on CNBC the other
> day, we're *stupid* not to use natural gas in the transportation
> sector.
On Oct 10 08:23 AM satchv2 wrote:
> If gas in the Middle East has no value please explain this to UAE,
> Qatar , and Iran.
>
> Your simple statement does not do your analytical skills proud1
In the case of oil, once demand exceeded supply the price rose exponentially. Now that supply and demand are more or less hand in hand again the price reverts to the marginal cost of producing the last barrel. Which, for oil sands, is pretty high.
Regarding domestic natgas, something close to the opposite is going on. Demand is well below supply and pricing has fallen to the lowest cost of production. Remember, once the well is built (using the term "well" generically) the operator might as well run it as long as the sales price exceeds the cost of operating. So lots of wells are being capped and we are down to the lowest cost producers.
Since that is the basis of my beliefs, I think that natgas will respond primarily to the domestic economy, meaning pricing rebounds in late 2010. Oil will probably come back sooner as supply cannot keep up with demand when the worldwide economy is at full speed.
For more analysis, check out my blog: youngandinvested.com
I'm new at this, so consider the following in that light. I touch on a few things here that are more recent than my articles or blogs. But what I'm developing is not yet ready for publication.
Long-term I'm bullish on NG. But I've been studying up on this for a little while now and I believe you are early, *especially* in UNG.
It has some structural issues that gives a negative roll yield as long as futures are in contango, like now.
www.nymex.com/ng_fut_c...
www.nymex.com/ng_fut_p...
If the roll forward was done Friday 10/9, contracts owned would drop 10.5%, before "friction" is considered.
Last I looked, Feb-May contracts were showing some signs of coming normalization, or even "backwardation" that would give a positive roll yield.
But even if that holds, which is uncertain, the negative roll yield will eat you until then unless NG prices move up big time.
I don't believe this will happen.
Right now you are paying a premium for UNG. See
www.unitedstatesnatura.../
Next roll dates are Oct. 14-19. See
www.unitedstatesnatura...
Over 60% of the time, UNG price drops immediately prior to and during this period. That's the time to buy *if* you must use UNG, which I advise against for now.
Many advise buying the min-contracts directly, but that's beyond me for now, so I can't offer a thought on that.
EIA projects *average* (across all price stations) NG prices for October at $2.25. The November contract (current UNG contract) dropped $0.193 last session to $4.77 and seems to be following the pattern of all the front-month contracts recently - trending down. Spot closed at $3.92.
If the EIA projected price is on target, and that $0.85 differential of spot:futures holds, the futures contract will be dragged down further to $3.10. If we use a +21.7% differential instead, the future would go to $2.738. Of course, that presumes there are no reasons for buyers to bid up the futures. But it seems folks are hanging their hat on the projected colder than normal winter without considering factors aside from that, so prices may continue up, contrary to what my assessments would indicate.
Further, there will be some buying by consumers wishing to lock in fixed prices and delivery (I don't think they need to worry about delivery though) and this will lend some support to higher prices.
Before the roll, the future contract to NAV is 2.39:1. This means that we could be looking at NAV of $7.409 - $6.544 *if* that $2.25 price works out as EIA says and no catalyst appears and the "lock in" above isn't a strong factor. Further, the negative roll yield will further reduce the ratio of NG:NAV. I don't know how much.
As you might expect, this ratio has been falling as each roll occurs, because of the contango. A few months back it was 3.4:1, if I recall correctly. This was before the CFTC caused changes in the way UNG does business, which may increase the expense ratio as OTC swaps must now be used along with the futures.
Sentiment and reliance on past seasonal price actions could hold the NG front month contract price up, just as it brought a huge jump in the last couple weeks, but I really don't think the trend will hold.
From Oct. 2008 through July 2009, industrial use was down 10% compared to the same period 2007 to 2008. Industrial accounted for 28.94% of consumption during that earlier period. Commercial was 13.20%, electrical generation 29.04%, vehicle fuel 0.13%, residential 20.54%. I mention this so you can apply your own estimates of the effects of weather and the economy on these elements.
Total consumption for Oct 2007 to Mar 2008 was 12,323.18 Bcf (excluding lease/plt and pipeline/dist which averages about 8% of wellhead production). The same period for 2008 - 2009 was 12,038.87 Bcf, a -0.0231% decline.
However, as we recall in the 2007 - 2008 period we had not yet felt the full effects of the recession kick in yet. For comparison, here's some declines, as compared to the same months in 2007 - 2008, for April through July of this year, which average -5.1%.
Apr -0.0481
May -0.0565
Jun -0.0579
Jul -0.0416
If these declines hold, we can expect consumption (ignoring lease/plt and pipeline/dist) for the October - Mar period to be only 11,694.70 Bcf. If we allow for colder weather requiring an extra 2%, we get 11,928.59 Bcf.
Gas in storage on 10/2 is all time high @ 3,658 Bcf, 15.1% above 5 year average range, and EIA says it will be full before Oct. is over. I expect we'll see another 75 Bcf or so in the next report detailing through 10/9. Anyway, this means on 10/2 we already have 30.7% of requirements for the Oct - Mar period already in working storage. So we only need to produce 8,266.5 Bcf to satisfy needs (only if we were willing to completely draw down all working storage - not a good idea). So that means in 26 weeks, we only need to produce 317.94 Bcf per week to get through the drawing season.
For Oct 2005 - Mar 2009 the *average* monthly marketed production was 1,677,829.7 MMCf (1,677.83 Bcf). Using 4.345 weeks for the average month, this works out to 386.15 Bcf per week. At an average difference of +68.21 Bcf/week over requirements, we should not have any shortage appear.
At the end of March, we should still have somewhere around 1,773.46 Bcf (1.7735 Tcf) of working storage gas IF WE ASSUME NO NEW PRODUCTION ADDED - not supported by the rigs coming on-line in the last 12 weeks.
New gas rigs were added 11 of the last 12 weeks and the count is now at 726 (+14 this week). Of course, some of the new wells coming on-line will be replacing depleted wells, but that should be a relatively miniscule number.
Although not a perfect test, the rig counts are now at the level of Jan 2003 and weekly average was 389.11 Bcf/week in that period. So this seems to lend credence to the marketed production estimate above.
With storage at 15.1% above 5 year average range, new rigs coming on-line, OFOs (Operational Flow Orders) already restricting unbalanced flows in/out of storage (due to capacity constraints) and operators denying (storage) access to producers with interruptible contracts and even restricting some pass-through flow, I can see no real upside to the natural gas prices yet BASED ON FUNDAMENTALS.
From one Tarheel to another - BE CAREFUL OUT THERE!
HardToLove
On Oct 10 02:45 PM John Lounsbury wrote:
> Dr. Banks - - -
>
> Look at the 15 month chart for UNG. When I see a trend like that
> (straight as an arrow from over $60 to $9.01on Sept. 3), it makes
> my contrarian blood boil. Any commodity that loses 86% in 15 months
> gets my attention. Now, the close on Friday was $11.81, up 31% from
> Sept. 3, but still down 81% from July, 2008. Simply looking at the
> oil/nat gas price ratio (which is not reliable to do rigorously,
> as the author has cautioned in the article), UNG could well be around
> $30 +/- right now.
>
> I know from your past comments that you are not a big fan of traders
> and technical analysis, but I hope you will allow me the liberty
> of disagreeing with you on such grounds. And, for one little fundamental
> creeping in for consideration, we are going into winter in the northern
> hemisphere. That is when demand for nat gas increases seasonally.
>
>
> So, I respectfully take the opposing view to you and support Mr.
> Gheit. I bought UNG a couple of weeks ago and put it in my contrarian
> portfolio for the autumn at TheStreet.com (www.thestreet.com/stor...)
> and (www.thestreet.com/stor...)
>
>
> By the way, glad to see your comment here. I always enjoy reading
> your comments, whether I agree or disagree, and have not seen you
> for a while.
Well John Lounsbury, I am NOT a fan of technical analysis, but a finance superstar once said that while he is also no fan, he occasionally pays it some attention. I don't do this because I am too lazy. I also need to take a closer look at natural gas. The change in gas reserves just doesn't look right to me. I spent the last week on Crete thinking about nuclear energy, but I read something in the Herald-Tribune about a certain Amy Jaffe saying that the "geopolitics" of natural gas are now going to change. If Ms Jaffee says that, I know that it isn't true.
About traders - and presumably oil. I will NEVER believe that traders are responsible for the oil price going to $147/b. I am completely satisfied with the work that I have done on that topic,
although I probably should do more before I forget futures markets fundamentals. Maybe I should add that - as a group - traders in the U.S. might be the smartest people in the world. As for other countries, well.....
Thanks for such a comprehensive review of nat gas fundamentals. You provided much more depth than I had gotten to on my own. I have taken the UNG position as a trading opportunity, not an investment. I admit that I could have tried to take advantage of the contract roll-over price impact and did not.
I am aware that you have written extensively on nat gas. May I suggest that you consider writing a monthly analysis of the market? You might chose to time the articles around the monthly futures contract roll over dates, either just before or just after.
I've invested in natural gas in the past and have lost more times than I've gained, I still find it a very intriguing subject, one that can be very, very lucrative if you get it right. And living right in the middle of one of the most gigantic natural gas fields on the planet, you'd think I'd know something about it. I don't. All I know is that when you cut the branch off a tree, natural gas comes out.
I'm going to have to take the time so sit down and dedicate a hour or two just to reading all your posts on this subject. I don't think I could find a quicker or better schooling on the subject.
Normally I don't pay as much attention to "fundamentals" as I do to the technical side. But in the case of natural gas, the seasonal factor just makes too much common sense to ignore. At the same time though, underground storage capacity in Canada is pretty much topped up and I understand it's almost topped up in the U.S. as well. To my way of thinking, gas should therefore be falling, in spite of the seasonal tendencies.
And yet...BOOM, it takes off in Sept. just as it does every Sept. To my non-informed eye, this made no sense. That's a good way to lose money, isn't it. Fortunately I stayed out of it because of the conflict between the seasonality and the "topped up" storage condition.
There's something really goofy going on that I wasn't understanding and you're analysis is extremely valuable in clearing it up. I think there are probably a lot of readers here who are interested in the gas play and who are more than happy to hear what you have to say. I know I do. Thank you!
I completely agree with the possibility that oil could spike well over the old highs and it would be a disaster. We should pay more attention to supply destruction than demand destruction and embrace the natural resources that will grant us economic and energy independence.
> H.T. Love - - -
>
> Thanks for such a comprehensive review of nat gas fundamentals. You
> provided much more depth than I had gotten to on my own.
As you probably noted in my bio, I'm big on "sharing". It's the only way to repay others for all I've learned here.
> I have taken
> the UNG position as a trading opportunity, not an investment. I admit
> that I could have tried to take advantage of the contract roll-over
> price impact and did not.
I'd like to suggest that you pick a reasonable time-frame and strike-price and write some covered calls so you can "get paid to wait". That's what I do in my retirement accounts and have garnered some small gains that way even as UNG prices dropped.
Or you can buy some puts to limit downside. I know you are already aware of these, but NG is just so uncertain these days and UNG with contracts in contango has such a high negative roll yield that I try to always remind folks to use some options with UNG.
>
> I am aware that you have written extensively on nat gas.
Naw! I'm still a tyro compared to some of the long-time contributors here. Using SA's search facility with "UNG", "natural gas" or "energy" will yield *lots* of folks with opinions counter to mine.
<*sigh*> They sure make it hard for a n00b ilike me to get over-confident, no?
> May I suggest
> that you consider writing a monthly analysis of the market? You might
> chose to time the articles around the monthly futures contract roll
> over dates, either just before or just after.
With my attitude about "sharing", I'd love that. However, I've still too much to learn in so many areas (heck, I'm still discovering, or folks point me to, new resources almost every week). Until I meet my criteria of a high level of competence, I'd feel uneasy acting as a "knowledgeable" regular contributor. That's why you see me constantly reminding folks (except those I know are familiar with me already) that I'm new.
On top of that, gathering data points and combing them with things to consider (weather, economy, ...) and then presenting them to other folks that haven't the time to do the digging is a *lot* easier than figuring out what trend "Mr. Market" is enamored of this week.
I don't know how long until, if ever, I'll think I've got "Mr. Market" figured out. And of course, when that happens he'll spank me good and proper! :-((
But thanks for the kind comments and the suggestion.
V Live long and profit! ..... er "prosper".
Good fortune to you on the UNG excursion!
HardToLove
> H.T.Love, I follow you mainly because although you often admit that
> you're still learning, how can I not be impressed with how fast you're
> learning? (not to mention that you're a pretty good guy).
LoL! If only you knew how *slowly* I feel like I'm going. I guess it's because there's so much to learn in so many areas, my hopes are not being supported by reality!
As to "good guy", thanks. But I have my faults, for sure.
> But, your
> depth of study on the topic of natural gas goes way beyond the bounds
> of "normal". You've uncovered facts I would never even have thought
> of.
I've always been good at learning. But I've felt for a long time that my real strength is in the "associative processer" area. Back in the days of my computer career (began in 1969 in school), I always seemed to have a knack for coming up with "out of the box" solutions that met a specific need faster, or cheaper or had more power, ...
>
> I've invested in natural gas in the past and have lost more times
> than I've gained, I still find it a very intriguing subject, one
> that can be very, very lucrative if you get it right. And living
> right in the middle of one of the most gigantic natural gas fields
> on the planet, you'd think I'd know something about it. I don't.
> All I know is that when you cut the branch off a tree, natural gas
> comes out.
LoL! Does the ground "burp" too when you walk on it? ;-))
>
> I'm going to have to take the time so sit down and dedicate a hour
> or two just to reading all your posts on this subject. I don't think
> I could find a quicker or better schooling on the subject.
Pshaw! Two things: I'm verbose. If you can read all I wrote in a couple hours, you obviously are "skimming"! ;-))
Second, we both know I've only started to skim the surface. Why just last week one kind poster reminded me of the price seasonality, which I knew, but I got so involved in the other stuff I forgot to consider it at that time.
When I really know something, I won't make that sort of slip often.
>
> Normally I don't pay as much attention to "fundamentals" as I do
> to the technical side. But in the case of natural gas, the seasonal
> factor just makes too much common sense to ignore. At the same time
> though, underground storage capacity in Canada is pretty much topped
> up and I understand it's almost topped up in the U.S. as well. To
> my way of thinking, gas should therefore be falling, in spite of
> the seasonal tendencies.
One useful term I spotted a while back, and the power of it: "sell siders". I believe, without any sort of proof, that folks that have to feed thier family get marching orders from someone that says "'Tis the time, of the season ..." (if you admit recognizing that lyric, you date yourself, so be careful! ;-)) And they don't have time to research or consider, just as many investors don't. That's why I'm so high on a site like this. The "community knowledge": each of us has time, interest, strength to learn in at least a small area. If we can share that, we *all* benefit.
>
> And yet...BOOM, it takes off in Sept. just as it does every Sept.
> To my non-informed eye, this made no sense. That's a good way to
> lose money, isn't it. Fortunately I stayed out of it because of
> the conflict between the seasonality and the "topped up" storage
> condition.
Time will tell, but I *believe* that's the right move for now.
>
> There's something really goofy going on that I wasn't understanding
> and you're analysis is extremely valuable in clearing it up. I think
> there are probably a lot of readers here who are interested in the
> gas play and who are more than happy to hear what you have to say.
> I know I do. Thank you!
As as I've said before, my pleasure. I firmly believe that as I try to contribute, I'll recive back, in spades. And to close, think of those famous lyrics from Arlo Guthrie in "Alice's Restaraunt": "... and then it's a movement".
Good to hear from you again.
Working on my first million,
HardToLove
"For Oct 2005 - Mar 2009 the *average* monthly marketed production was 1,677,829.7 MMCf (1,677.83 Bcf)."
and I meant
"For the months of Oct - Mar for 2005 - 2009 the *average* monthly marketed production was 1,677,829.7 MMCf (1,677.83 Bcf)."
Sorry for any confusion this may have caused.
HardToLove